Economy
Economy is defined as a social domain that emphasises the practices, discourses, and material expressions associated with the production, use, and management of resources. Economy answers to four main questions: * What to produce? It defines the needs and the necessities in order to choose the right product. * How much to produce? It defines the right quantity of goods to produce. * How to produce? It defines the right organization for the production. * How to distribute? It defines the best distribution system for the product. Economy deals with the relationships established between several different economic operators (such as consumers, producers, workers) who handle the productive factors (like land, capital and labor). These so-called productive factors are able to provide an income while the agents work towards the production of goods which are capable of satisfying people's needs, through consumption. Macroeconomics and microeconomics The difference between micro and macro economics is simple. Microeconomics is the study of economics at an individual, group or company level, while macroeconomics is the study of a national economy as a whole. Macroeconomics Macroeconomics focuses on economic relationships and the effects that those have among the economy as a whole (GDP, inflation, unemployment, etc..). The role of the state is also extremely important in this economic field, since it has the power to influence the entire market. Microeconomics It deals with the behavior of individual economic agents (for example a consumer’s or a producer's choices, individual companies, price determination, etc..). Budget constraint When studying economic processes, everything is based on the lack of goods. Usually goods become more desirable and gain a greater economic value because of their rarity. Since goods aren't available in such quantities as to satisfy the needs of every economic operator, they must be managed in a planned and rational way, through smart choices. Budget constraint (or budget line) is the representation of the baskets of goods and services that the consumer is able to purchase in relation to his income and the prices of those goods and services. Examples If two types of goods are taken into consideration, X and Y, a family with a monthly income R would not be able to buy an unlimited quantity of the two goods, whose prices are Px and Py, but the same family may decide to buy baskets of those goods, whose value would match the value of the income that the consumer is willing to spend: R = x · PX + y · PY where x and y represent the quantities for X and Y respectively. The absolute slope of the curve is equal to the price of the first product, in relation to the price of the second one. The family expenses for assets x and y must be equal to or less than their income. Market A market is a place where buyers and sellers of a specific good or service meet each other in order to facilitate an exchange. This could happen in a physical marketplace where people literally interact with each other or in a virtual one where everyone acts in front of their own screen. Demand The demand of a good or service is the amount of that good or service that consumers are willing to purchase in relation to the price change. The goal of consumers is to buy the more they can at the lowest price and this is why, on a cartesian graph that has the price on the Y axis and the quantity demanded or supplied on the X axis, the curve slopes downward. This general curve is the sum of all the single curves. Supply The supply of a good or service is the amount of that good or service that the producer is willing to produce in relation to the price change. The goal of producers is to sell the more he can at the highest price and this is why, on a cartesian graph that has the price on the Y axis and the quantity demanded or supplied on the X axis, the curve slopes upward. Companies do this in order to maximize profits as well as they can. Competitive Economy Competitive economy is the condition in which several companies compete on the same market producing the same goods or services that satisfy a certain group of buyers. Perfect competition We call perfect competition that form of market in which producers and customers don’t have the power to influence the market price. Therefore, the prices aren’t set by each company. To make it more clear, a market which exhibits the following characteristics in its structure is said to show perfect competition: * It’s not convenient to increase the price because the consumer would buy it from other companies at a lower price; * It’s not convenient to lower the price because nothing prevents companies from doing the same, obtaining a lower final income. Equilibrium price Equilibrium price is the price where the demand for a product or a service is equal to the supply of the product or service. Its determination delineates the Law of supply and demand. How it is determined Depending on what happens to demand and supply, we must do certain changes to quantities and prices in order to obtain the equilibrium price: * Increase in demand: increase in price or in quantity; * Decrease in demand: decrease in price or in quantity; * Increase in supply: decrease in price or increase in quantity; * Decrease in supply: increase in price or decrease in quantity. What if it is not followed If the chosen price is greater than the equilibrium price: * Excess in supplies * Lowering of the price until the equilibrium price is reached If, instead, it is lower: * Excess in demand * Offered quantity is less than the amount of equilibrium * Demanded quantity is greater than the amount of equilibrium Price elasticity of demand Price elasticity of demand (ED or PED) is a measure used in economics to show the responsiveness or''' '''elasticity of the quantity demanded of a good or service to a change in its price when nothing but the price changes. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price. Elastic demand Demand is considered elastic if the percentage change in the price causes a percentage variation in the quantity demanded more than proportional, for example: if the price increases of 10%, the demand reduces of 20%. We have total elasticity only for useless things. Inelastic demand We say demand is inelastic if the percentage change in the price causes a percentage variation in the quantity demanded less than proportional, for instance: if the price increases of 15%, the demand reduces of 5%. It is total only for essentials. Steady demand It’s called steady when the percentage change in the price causes an equal percentage variation in the quantity requested: increase of price and decrease of demand have the same percentage. Other causes of demand change If the price remains untouched, some changes in other market conditions may occur that could result in a shift in demand: * Customer's income; * Prices of other products; * Customer's preferences. Income The relationship between changes in income and changes in demand can be analyzed. If the consumer's income increases, the quantity asked for a product usually increases, even if the price remains the same. Prices of other products Let's now analyze the existing relationship between the changes in the prices of other goods and the changes in the quantities of a specific one. Substitute goods If a product is a substitute of another one, the increase in the price of the first causes the increase in the quantity of the second, even if the price remains the same. For example, if the price of butter were to increase, the asked quantity of margarine would increase as well. Complementary goods If a product is complementary of another one, the increase in the price of the first causes the decrease of the demanded quantity of the second, even if its price hasn't changed. For example, if the price of coffee increases, the asked quantity of sugar is going to decrease. Preferences and taste There is a direct relationship between the variations of trends and customer's tastes and the variations of the quantities purchased of a certain product: * If a product is no longer fashionable, its demanded quantity decreases a lot, even if the price has remained untouched. * An effective advertising campaign causes a considerable increase of the demand for an asset, even if the price is still the same as before. Supply Supply (or offer) is the amount of a product that sellers are willing to sell at a certain price. Various factors affect the offer, but the most important is the price. Other factors are production costs, the introduction of new technologies, climate, laws, ... Price/quantity change There are three phenomena to take into consideration: * If the price increases, the quantity offered increases; * If the price decreases, the quantity offered decreases; * If the price remains the same there may be variations in other market conditions that determine a shift in the offer, like the introduction of new technologies, changes to the costs of production factors, climate, laws, etc. Introduction of new technologies If a new technique is introduced, the quantity offered increases because the costs for the company decrease and profits increase. Production costs In the presence of an increase in the price of a production factor (e.g. increase in wages / interest / income) the quantity offered decreases because the profits for businesses decrease. Climate and other variables If we consider agricultural products the offer increases if the climate is favorable and vice versa. Other variables can be for example new laws that can change the behaviors of entrepreneurs. Example: a law that gives contributions to those who produce ecological goods will cause an increase in these products. Movements of the supply curve The variation of the market conditions of the offer determines a shift of the offer. # Graphically, if the offer increases, the curve moves to the right and the quantity offered increases. # If the offer decreases, the curve moves to the left and the quantity offered decreases.